An overpayment to an employee is generally the result of a payroll calculation error. As an employer, an overpayment may happen if you pay the employee more hours or salary than she’s entitled to or if you fail to make a mandatory or voluntary deduction. In either case, you can fix the situation.
Consult State Law
The moment you discover the mistake, consult with the state labor department for its procedures for collecting overpaid wages. Many states allow you to make such deductions via payroll deduction. Depending on the amount owed, you may withhold pay over a series of paychecks as a lump sum. State law generally limits the amount you may withhold within one pay period. Note that besides mandatory deductions, the state may not allow you to make any deductions from an employee’s pay without her written consent. Further, the state may forbid you from making the deduction if it causes the employee’s income to drop below the required minimum wage.
Collecting the repayment via payroll deduction can be convenient for the employee, particularly if you made the error and the employee has already spent the overpayment. If you discover the mistake shortly after paying the employee and you notify him promptly, the employee may be able to pay the overpayment immediately. If you’re collecting the overpayment via payroll deduction, notify the employee of the situation in writing and include details of the overpayment, such as when the overpayment occurred, the amount, when each payroll deduction will occur and the deduction amounts. Give the employee other payment method options, such as personal check, money order or cash. If the employee’s written consent is needed to make the deduction and the employee refuses, you can attempt to recover the overpayment by filing a lawsuit in court against the employee.
When you collect the overpayment, you must also adjust the employee’s payroll records accordingly. For example, if you overpaid salary by $200 for a particular pay period, make the adjustment as a negative so it’s taken out of the employee’s year-to-date earnings and her W-2 will be correct for tax purposes. When you overpaid the employee, taxes and deductions associated with the overpaid amount are also taken out of her pay. Payroll software automatically adjusts the employee’s payroll records when you enter the overpayment as a negative. If you do not use payroll software, manually figure out the difference between her original deductions and what they should have been. The difference is the overpaid deductions amount. When you subtract the overpaid salary from the employee’s pay, it reduces her total income and adjusts her deductions by reducing the amounts. If the overpayment is due to a deduction that was not being taken at all, adjust the deduction as positive so it’s deducted from her income.
Unemployment Tax Overpayment
You are required to pay federal unemployment tax and state unemployment tax up to a certain amount each year on all employees you pay wages to. When you overpay an employee and you have not met the annual wage limit, it may result in you overpaying both federal and state unemployment tax. In this case, report federal unemployment tax overpayment to the Internal Revenue Service and state unemployment tax overpayment to the administering state agency so you can receive credit for the overpayment.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.